Stuart Law, founder and chief executive of Assetz Capital, discusses tangible assets and their importance in the P2P sector
While the peer-to-peer finance market continues to steadily grow, one on-going question remains: what is the best way to safeguard investor funds? The market to date has lured early adopters, high-net-worth individuals and other savvy investors, but in order to grow and expand, one thing is critical – attracting a large number of retail investors. Mitigation of risk is important for the experienced investors who understand the risks and are willing to jeopardise a little for big returns. However, in order to convert new retail investors to P2P, more reassurance is definitely required.
Financial Conduct Authority accreditation will go a long way in helping achieve this reassurance and facilitate step change growth. So too will much clearer methods used by P2P platforms that can protect investors and minimise the impact of loan defaults. Retail investors will be lured by the headline return figures, but they also don’t want to have to pore over countless credit reports to make a decision on a £1,000 loan. They want to trust the methodology and best practice implemented by the P2P platforms.
However, we’re a long way from perfect. Ask the top ten P2P lenders about what they are doing, and you will get ten different responses. Provision funds, diversification strategies, risk management and of course tangible assets are some of the methods deployed currently.
Ultimately the success of individual P2P players and the market as a whole depends on defining and implementing a unified code of best practice in relation to the use of tangible assets. From our perspective, the use of tangible assets are best for larger loans, yet there is no clear definition of what this means, how they are assessed, valued, vetted and utilised if required.
Here’s the abridged dictionary definition: tangible – something that is touchable and enduring; intangible – something that is ethereal and untouchable.
Applied to banking, there are two clear distinctions and some very grey middle ground. Property, plant and machinery and stock are all tangible assets. They are physically present and we can touch them and value them against recognised valuation methods. Goodwill is completely intangible. A brand has an intangible value. The Coke brand is just a name – you can’t touch it or lock it away but it has $100bn+ value just as a brand name. The product (the drink itself) is tangible and people pay for it by the litre. It’s cheap as a product but the value of the company is in the brand name.
Now for the grey area. In B2B finance, this specifically refers to the assessment of debtor books. Invoices can be tangible as they exist physically, but the value of each and every invoice varies for many reasons, including retention on title issues, call-off stock, contra invoices and failure to complete contracts. In a default situation, the ability to get back 100p in the pound on the debtor book is near on nil, which means there is an element of intangibility to it.
As an example, one legal services business applied for funding through Assetz. Its tangible asset was its work in progress (WIP). Our definition of tangible assets didn’t include WIP, as the work isn’t completed and if the business goes bust it’s hard to sell part finished work. However, as the company’s WIP are verified law suits awaiting settlements which have been agreed and guaranteed by the defendants, in this case it is a tangible asset, and the company got its loan.
The progress of the P2P market ultimately depends on platforms adhering to the pure definitions of tangible; any wavering from this will lead to risk, defaults and ultimately losses. Loose definitions of key concepts, such as tangible assets, risk damaging the industry.
While gaps and loopholes may appear from time to time, responsible lenders need to continuously adapt with a single purpose in mind: safeguarding investors in order to grow the reputation and future of the market.